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The Waterfall’s Edge Approaches

Hate to be so gloomy in the wake of Thanksgiving, but Italy is now paying almost 8 pct on its two-year bonds. That’s curtains, folks. The red line was 7 pct for 10-year bonds, now we’re getting to beyond beyond, and in an economy that does more than export olives. When the two-year yields more than the 10-year, you know traders left liquidity worries in the dust and moved on to solvency worries. As if on cue, we have word that the EFSF savior fund will not only not double its firepower, it could “deliver as little as half what the bloc’s leaders had hoped for because of a sharp deterioration in market conditions over the past month,” sayeth the FT. Financial markets are in big trouble. Remember the words of Carmen Reinhart and Kenneth Rogoff in their working paper, A Decade of Debt: “As countries hit debt intolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment. For many if not most advanced countries, dismissing debt concerns at this time is tantamount to ignoring the proverbial elephant in the room. So is pretending that no restructuring will be necessary.” — 11/25/11

New Kelly Letter Notes

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Socks for Japan, Phase II

Socks for Japan embarked on two distributions to the disaster zone in October, one to Ishinomaki on Saturday, October 8 and the other to Onagawa and Ishinomaki on Monday, October 17.

While work crews have cleaned up the area dramatically, it is still a disaster zone. Living among the rubble is hard for people. They walk or ride bicycles or drive recently-purchased used cars past wreckage that reminds them of friends lost and businesses washed away. … We’re now able to stop at functioning convenience stores and gas stations. The inventory isn’t yet the same as it is in undamaged parts of the country, but a semblance of normalcy is creeping back in. Creeping is the operative word, though, as scenes of damage still dominate the landscape. …

Makiko finally witnessed firsthand the destruction she’d monitored so carefully from New Jersey. It’s one thing to read about it and watch news clips of it; quite another to walk into it. Back in her mother country for the first time in five years, she experienced a tsunami of emotion from within the devastation wrought by the tsunami of seawater seven months earlier.

France’s AAA Rating Shot

We knew this was coming, and now all that’s left is the official acknowledgment from one or all of the rating agencies. French 10-year sovereign bonds yield 3.5 pct at a spread over German 10-year bonds of 1.58 pct. That yield is higher than Belgium’s, which is rated just Aa1 by Moody’s.

All of which is to say that investors don’t trust French finances anymore, and are dumping their French debt, which makes the price of bonds drop, which sends the yield spiking. France will have to pay more interest to finance future borrowing. The 7-pct line is where emergency lights went off in other EU economies, including Italy, and France may yet get there. — 11/23/11

Paperless Gone Too Far?

Domtar, the paper company, is running a great campaign now called Paper Because to show that paper still has a place in our increasingly paperless world. I love the campaign because it uses humor to make the point, and leaves people nodding with familiarity at the obsession. Below are three of Domtar’s videos. You can view them fullscreen with the buttons in their lower-right corners. — 11/24/11

US Rating Ready to Drop

Speaking of sovereign debt ratings, the Congressional superfluouscommittee’s failure to draft a debt reduction plan as America’s debt soars beyond $15T has most analysts bracing for another credit-rating drop for the nation. The first one happened last August when S&P dropped its rating on the US to AA+ from AAA. Talk about politicians sneaking around the supposedly automatic spending cuts that would kick in following a failure to draft a plan means rating reductions are even more likely.

Is this a big deal? Yes. Decades of ineptitude have put America on the path to Greece. There was a time when the phrase “backed by the full faith and credit of the United States Treasury” was considered good as gold. Not for much longer. Reprehensible. — 11/23/11

Retirement Perspectives

As long as I’m in a video mood, check out this wonderful campaign put together by Prudential (PRU). The stock is down 23 pct this year to $45. The firm wants to bulk up its retirement management business in light of an aging American population, and the stories below are from its campaign to do so. Well done. I would be interested in the stock below $35. The player loads after you click the play button, lower-right square takes it full screen. — 11/24/11